The Rise of Bitcoin and SMSF Investment Strategies

With the meteoric rise of bitcoin over the past year, popular interest in it and other digital currencies has grown exponentially.

The SMSF community too has been very interested, with a growing number of trustees branching out to include digital currencies in their investment strategies.

SMSFs are the only vehicle through which investors can include digital currencies in their superannuation investments. For those who already have an SMSF, incorporating bitcoin, ethereum and other digital currencies is relatively straightforward. However, there are some things that are important to know.

Get strategic

SMSF trustees have to exercise the same due diligence around digital currencies as they do around any other investment within the SMSF, and all asset classes need to be allowable under the SMSF’s deed. It’s important before making an investment in digital currency that the investment is an approved part of the fund’s investment strategy.

Audit your exchange

Bitcoin and ethereum, as well as other digital currencies like bitcoin cash, can be purchased on digital currency exchanges. For SMSFs there may well be value in choosing an exchange based in Australia, as local operators are more likely to understand the unique requirements of SMSF investors, as well as comply with the new AUSTRAC rules around digital currency trading.

Research exchanges and find out which offer services specifically for SMSFs. These will include a slightly different sign-up process to that offered to individuals; reports to assist in reporting and compliance; and the ability to transact using the SMSF’s bank account rather than a personal one. All these features are important when it comes to audit time.

Which wallet?

Once the SMSF has purchased digital currency, it can either be withdrawn from the exchange and kept in a ‘wallet’, or stored on the exchange within the SMSF’s account. If the trustee chooses to keep the assets on an exchange, they should ensure that it uses best practices for security. These include the use of what’s known as ‘cold storage’, multiple time encryption, multiple directors and trustees required to access the exchange, offline devices stored across multiple vault providers and multiple security teams guarding those vaults.

If the trustee feels capable of keeping the wallet secure, they can set up a specific wallet for the SMSF, and should do so to keep the investment compliant under the ‘sole purpose’ test. The trustee of the SMSF is responsible for keeping records of digital currency transactions in and out of the wallet and this information will be used for audit purposes.

If the SMSF decides to sell digital currency assets, the trustee must ensure the funds go back in the SMSF’s bank account.

One important point to note is that new digital currencies can be acquired when there is a ‘fork’ in an existing digital currency. When a fork occurs, such as that which created bitcoin cash in 2017, all holders of the original digital currency (in this case bitcoin) automatically receive the same amount of the new one. The trustee will need to keep abreast of any new coins received via this channel and ensure they’re reported for audit.

A taxing issue

The ATO released guidance around the tax treatment of digital currencies last year. The trustees of an SMSF that disposes of bitcoin or other digital currencies for a profit will be liable for capital gains tax in the same way they are for other assets such as shares. A full set of guidelines from the ATO can be found here.

This article is general in nature and does not constitute financial advice. For specific advice regarding your SMSF and digital currencies, speak to your financial advisers.

Article Source: Nestegg | A.Przelozny

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